Traders Expect to Be Frustrated by Warsh’s Jackson Hole Speech

During early European trading hours on Friday, the USD/CAD pair remained stagnant around 1.3850. Traders chose to remain on the sidelines, waiting for Federal Reserve Chair Kevin Warsh's speech at the upcoming Jackson Hole Symposium for insights into his policy outlook. The latest core Personal Consumption Expenditures (PCE) Price Index inflation data released on Wednesday aligned with market expectations, which led traders to bolster their anticipation of a rate increase in September.

According to the CME FedWatch Tool, the likelihood of a Fed rate hike in September grew to 40% from 36% prior to the data release. The Jackson Hole symposium might shed more light on Warsh's perspective regarding the US economy, interest rates, and how the US central bank intends to bring inflation back to the Fed's 2% target. If Fed officials were to express hawkish sentiments, it could potentially curb the Greenback's decline in the near term.

Mark Cabana, head of U.S. rates strategy at Bank of America, commented that traders are hopeful Warsh will indicate readiness to raise rates again if inflation does not continue to ease. Conversely, if Warsh concentrates on broader structural themes like productivity or demographics during his speech, markets might perceive it as dovish.

The US-Canada trade dispute could negatively impact the Canadian Dollar and provide a boost to the pair. Canada recently imposed 50% tariffs on US-made copper wire and wood charcoal, as replacements for removing fish and seafood products from its retaliation list. Standard Chartered economists note that, despite the recent tariff escalation, policymakers may still wait for more data to evaluate the impact of the new tariffs on growth and inflation.

The combination of a rebound in Q2 growth and ongoing uncertainty about the effects of the latest US measures on the Canadian economy provides the Bank of Canada (BoC) with the flexibility to maintain a wait-and-see approach while assessing whether the shock significantly alters the medium-term outlook. The daily chart indicates a bearish bias for USD/CAD, with spot trading beneath both the 20-day Bollinger simple moving average (SMA) and the 100-day SMA.

The pair is moving away from the upper half of the recent Bollinger envelope, and the Relative Strength Index (14) stands at 40, indicating subdued upside momentum and suggesting risks are tilted towards a deeper corrective phase. The first significant resistance level is in the 1.3905–1.3915 range, where the 20-day Bollinger SMA aligns with the 100-day SMA.

A breakthrough above this cluster could alleviate immediate downside pressure and pave the way for the upper Bollinger band boundary near 1.4065. Conversely, the first notable support is at the lower limit of the Bollinger band around 1.3740. A clear breach of this level would reinforce the bearish trend and expose lower levels on the daily chart.

The primary drivers of the Canadian Dollar include interest rates set by the Bank of Canada, oil prices, the health of its economy, inflation, and the Trade Balance, which is the difference between Canada's exports and imports. Other factors consist of market sentiment—whether investors are taking on riskier assets (risk-on) or seeking safe-havens (risk-off), with risk-on being CAD-positive.

The Bank of Canada's influence on the Canadian Dollar stems from its ability to set interest rates, affecting rates for everyone else. The BoC aims to maintain inflation at 1-3% by adjusting rates up or down. Higher interest rates generally have a positive impact on the CAD. Oil prices significantly impact the Canadian Dollar, as Canada's largest export is petroleum.

If oil prices rise, so does the CAD value, while falling oil prices have the opposite effect. Higher oil prices often lead to a more favorable Trade Balance, further supporting the CAD. Inflation, once considered a negative factor for a currency due to its devaluation effect, has turned out to be beneficial recently with the relaxation of cross-border capital controls.

Higher inflation prompts central banks to raise interest rates, attracting more capital inflows and increasing demand for the local currency. Macroeconomic data releases, such as GDP, manufacturing and services PMIs, employment figures, and consumer sentiment surveys, also influence the Canadian Dollar. Strong economic indicators attract foreign investment and may encourage the Bank of Canada to raise interest rates, strengthening the Canadian Dollar. Conversely, weak economic data could lead to a depreciation of the CAD.